Bank of Ireland says Irish economy will grow by 6% in 2006

Finfacts Team:

The Irish economy is experiencing a consumer boom that is set to fuel economic growth of 6% in 2006, according to Bank of Ireland Global Markets economic outlook for 2006 that was published today. The outlook also shows that this spending is not being fuelled by debt, rather by increases in household income, which grew by 10% last year. In this respect, consumers can be said to have Berlin-style savings with Boston-style spending.

The outlook predicts that 40% of SSIAs will mature in 2006, a third of which will be spent adding over €2 billion to consumer spending this year. This will come on top of another strong year of income growth with employment set to rise by 4% and earnings by 4.5%, the net effect being an overall rise in consumer demand. This demand will be underpinned by increases in government, construction and business spending. The outlook predicts that output is unlikely to keep pace with this spending as the domestic economy does not produce the types of goods likely to see the largest increases in demand (cars, foreign holidays, consumer durables) and foreign demand is also likely to lag that of Ireland, limiting the growth of Irish exports to 6%. This will lag import growth, the net result being GDP growth of 6% from 4.7% in 2005.

According to Dr. Dan McLaughlin, Chief Economist Bank of Ireland Group, despite much comment the reality is that the current consumer boom is not fuelled by a debt driven consumer binge but by income growth.

“In 2005 consumer spending is likely to have increased by 6.5% while household incomes rose by 10%. In fact, consumer spending has lagged household income growth for a number of years, implying a rise in the personal savings ratio, which probably exceeded 14% in 2005. It is evident, therefore, that consumer spending is driven by income rather than debt and in that respect Ireland can be said to have Berlin-style saving but Boston-style spending”, said Dr McLaughlin.

According to Dr. McLaughlin, the real threat to the Irish economy is not rising oil price, a fall in the US Dollar or a slowing down of the US economy but the absence of a sovereign bank as this breaks the link between interest rates and activity.

“To date this has benefited the Irish economy, as Irish interest rates are probably too low for domestic conditions while appropriate for the sluggish German, Italian and French economies. There may come a time, however, when the reverse is true – the Irish economy slows, pushing up unemployment, but interest rates stay high because Germany and France are booming. In other words the real risk to the Irish economy is a country specific shock which hits hard here but leaves the larger European economies unscathed”, concluded Dr. McLaughlin.

Consumer boom 'to boost growth by 6%'

'Debt not driving spending surge'

Economy to grow by 6pc in 2006 - BOI